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Leverage v. “Should” Diplomacy

An old joke about American foreign policy mandarins holds that every S/P memo offers three alternatives: all-out nuclear attack, preemptive surrender, or the continuation of present policies. We were reminded of that by the consistent criticism that Trump is out of touch—out of his depth—all wrong—about China. The only way forward in our relations with China is to keep doing exactly what we’re now doing. There is no other way! And why need there be, since it’s all working out for the best? And even if it weren’t, there’s nothing we could do.

But that’s not the important part of the above formula. More interesting is the implicit fait-accomplism. Is it really true that there’s nothing we can do?

We’ve criticized before the typical American approach to diplomacy over the past 25 years or so, in which our side tells some other side that it “should” or even “must” do this or that. It’s in your interest! You need to be a stakeholder in the international system! If you do this, everybody wins—you most of all!

No country has heard this tired speech more than China. Its officials have endured it so many times they could recite it drunk. I sometimes imagine Chinse diplomats blowing off steam after a long day at the MoFA, hitting a Sanlitun bar, knocking back a few and seeing who can best capture the cadence of Deputy Assistant Secretary Worthington C. Ebbinghausen as he reaches the peroration of the American “You Should” speech. It must at the very least be difficult to keep to keep a straight face in actual meetings when Mr. Ebbinghausen begins his wind-up once more.

The bigger joke, of course, is our relentless naivety. It must sound incredibly funny to hear us tell them what their interests are. Like the leaders of any country, the ChiComs are pretty sure that they have a better idea of their own interests than we (or any foreigners) do. They also have the good sense to pursue those interests through policy, negotiation and much else. The fact that we don’t behave similarly with regard to our interests must strike them as insane—if also as an instance of their great good fortune.

Let’s hope that in a Trump Administration, Foggy Bottom, USTR, the NSC, and the rest of the sclerotic foreign policy bureaucracy will tear up that speech, forever bury “Should” Diplomacy, and send Mr. Ebbinghausen packing to CSIS.

The touchpoint of any foreign policy negotiation with an adversary is leverage. To be effective, rather than exhorting the other side about what they should do, we need to explain what we wantthem to do—and then bluntly tell them what we are going to do if they don’t. If you don’t have leverage, the whole point of the conservation is moot. The discussion itself is worse than useless.

Does America have leverage over China? Of course we do! Two yuuuuge leverage points: we owe them a lot of money, and their economy is utterly dependent on access to our market.

I can hear the wise and good yelp as I type. What are you suggesting? That we default? Destroy our credit and currency? Start a trade war? (Any suggested deviation from the Davos-quo is always denounced as the opening salvo in a “trade war.”)

Not exactly. You know the old saw: if you owe the bank $100,000, you have a problem; if you owe the bank $100 million, the bank has a problem. We owe China something above $1 trillion. That’s a big problem—for them.

We’re far from being experts on Chinese industrial espionage and intellectual property theft. But we do know that they are also big problems—for us. There would seem to be a potential connection, no? If you lent $100 to someone who then stole $50 from you, would you pay him back the full $100? Maybe, if you’re a chump—which, as Trump points out, the last thee administrations at least have been.

Oh, sure, our officials acknowledge that it’s a problem. They put it on the agenda at various summits, ministerials, bilats, trilats, multilats and other international fora. The Chinese listen silently—and then do nothing, confident that everything will go on as before. Because it always has. Because our side believes it has no leverage—at least none that it is willing to use—and that any deviation from the present course will bring on Armageddon.

Here’s an idea. Get together some of the best intellectual property experts in the world. Canvas industry and government for their stories. Hire the best accountants you can find. Commission the mother of all studies. Put together a report longer than the ObamaCare law.

Then, at the next meeting with the ChiComs—when they’re sweetening their French Roasts in order to stay awake through yet another “You Should” speech, which they’re sure is coming—drop the report on the table with a loud thud. And then surprise them with this speech:

Great to see you.

Here’s the executive summary of this report. Over the last 37 years, you’ve stolen from us $750 billion in intellectual property [numbers made up for now, of course]. It’s all detailed in the report. If you want to see the underlying analytics, we’ll upload them to a file locker of your choosing. It’s 25 terabytes. Yes, you’ve stolen that much—that we can account for. We promise no viruses—we really want you to read this.

Our view is that all this theft amounts to in-kind contributions that cancel our debt on a dollar-for-dollar basis. We’re happy to leave it at that—that is, in terms of what’s past.

Going forward, we obviously cannot continue to allow what’s taken place to continue. Further such espionage will be met not merely with further debt cancellations, but also with tariffs, up to and including restrictions and even closures to given markets. Our preference would be to restrict such closures to sectors directly related to those you target. We try to be fair. But we can’t promise anything.

If you’d like to talk about any of this—maybe make some gestures of goodwill to show us that you’ve gotten the message—we’re open to that. Go ahead with your gestures—we’re happy to wait and see. But not for long. Say, sixty days. Then the cancellations—which is to say, stopping service payments on debt that these figures show we’ve already paid in full—will begin. And you can forget about a return of principal on maturity.

If you want to borrow further from us, that would be fine—just know that going forward, the same calculation will apply in perpetuity. Whatever you get away with stealing, we count that as repayment. Otherwise, we fully understand if you’d like to park your sovereign wealth somewhere else. That could be tricky, given that we’re the only safe haven not currently charging negative interest. But that’s really none of our business, and good luck to you.

Of course this can’t be done. It just … can’t’! Deputy Secretary Ebbinghausen is appalled at the mere suggestion! Everyone would dump US debt. Treasuries would be worthless. The dollar would be finished as a reserve currency. And so on.

Certainly there is risk in such a course. But as to threats to our currency’s status, so long as our analysis is credible and rigorous, we can make the case to other borrowers that this move doesn’t apply to them. Unless they too are thieves.

Ah, but sovereign debt is fungible. What’s to stop the Chinese from dumping Treasuries? Well, nothing—except that’s just another way for them not to get paid back. Once we make the policy known (should it come to that; the threat might be the beginning of a fruitful new phase of our relationship and could be kept private), we can make it known to everyone else that, so long as they hold our debt, interest payments will be honored. That would effectively freeze Treasury trading for a time, reducing its value as a liquid asset. But the effect would be temporary—and worth it.

The alternative is to give in to the Ebbinghausens and fatalistically do nothing. Or, rather, to consider “action” to be endless ineffectual complaints about Chinese stealing. How’s that been working out for us?

This new approach might not work. It might have unintended consequences. But we’re going broke as it is. We owe a quasi-hostile power more than 5% of our GDP—all the while, that power steals from us with impunity. To refer once again back to JAG’s immortal motto: What difference, at this point, does it make?